domingo, 9 de dezembro de 2012

Brazil’s economy

A breakdown of trust

If she wants a second term, Dilma Rousseff should get a new economic team

Dec 8th 2012 | from the print edition

JUST two years ago, when Dilma Rousseff was elected Brazil’s president, the country’s economy was booming. It then ground to a halt and is now struggling to recover. Despite increasingly frantic official efforts at stimulation, the moribund creature grew by only 0.6% inthe third quarter—half the number forecast by Guido Mantega, the finance minister. Most market analysts now expect GDP growth to be less than 1.5% this year and not much more than 3% next year. So much for the notion that the B in the BRICs is a speedy economy.

The motors of growth that powered Brazil in the past decade are sputtering. Prices of commodity exports, though still high, are no longer rising. Consumers are using more of their income to pay off the loans with which they had bought cars and televisions. Low unemployment means there are fewer idle hands to be put to work. Instead of relying on consumption, growth now has to come from higher productivity and investment. That means hacking away at the “Brazil cost”: the combination of red tape, heavy taxes, expensive credit, creaking infrastructure and an overvalued currency that makes it a punishingly expensive country to do business in.

Despite all this, investment has fallen in each ofthepast five quarters. It now amounts to just 18.7% of GDP, against 30% in Peru in 2011 and 27% in Chile and Colombia—Latin America’s new high-growth economies.Ms Rousseff has recognised the need to improve competitiveness. Her economic team says its aim is to prompt a supply-side, investment-led recovery. In the past 15 months theCentral Bank has slashed interest rates by 5.25 percentage points, to 7.25% (only two points above inflation). That has helped to weaken the currency and help manufacturers. Thegovernment has cut payroll taxes for industry (but not most services). It is also slashing electricity tariffs and inviting private operators to upgrade airports, roads and railways.

Business is cautious because the government meddles too much. A prime example is its apparent desire to drive down thereturn on investment by diktat, not just for banks but also for electricity companies and other infrastructure-providers. Even more than her predecessor, Luiz Inácio Lula da Silva, Ms Rousseff seems to believe that the state should direct private investment decisions. Such micro-meddling undermines trust in macroeconomic policy as well.

Stop meddling and let animal spirits roar

The Central Bank may be tempted to react to the latest figures with another interest-rate cut. That would be a mistake. Instead the government should redouble efforts to cut the Brazil cost—by, for instance, tackling labour laws—and thus letting the private sector’s animal spirits roar. The worry is that the president herself is meddler-in-chief. But she insists she is pragmatic. If so, she should fire Mr Mantega, whose over-optimistic forecasts have lost investors’ confidence, and appoint a new team capable of regaining the trust of business.

Ms Rousseff’s hope seems to be that full employment and rising real wages will be enough to secure her a second term in 2014. But these depend on renewed growth. Lula won a second term because his policies lifted millions of Brazilians out of poverty. The electorate similarly rewarded Fernando Henrique Cardoso, Lula’s predecessor, because he slew inflation. And Ms Rousseff? Voters may judge that in trying to juggle so many economic balls, she dropped most of them.